MAY 06, 2019

By S Sivakumar, LL.B., FCA, FCS, ACSI, Advocate

AS TIOL netizens are well aware, the GST law, insofar as it concerns the Realty Sector, has been virtually re-written with effect from 1-4-2019 and that, the levy of GST at the lower rates without the benefit of ITC is compulsory for projects which commence on or after 1-4-2019 and that, in respect of 'ongoing projects', the Developer has the option to continue with the old scheme wherein, ITC is allowed. Hence, the new scheme would, by and large, boil down to the interpretation of the definitions of an 'ongoing project' and 'a project which commences on or after 1-4-2019'.

In terms of Notification No. 3/2019-CT(Rate) dated 29-3-2019, an 'ongoing project' is defined as under:

(xx)   the term "ongoing project" shall mean a project which meets all the following conditions, namely- 

(a)   commencement certificate in respect of the project, where required to be issued by the competent authority, has been issued on or before 31st March, 2019, and it is certified by any of the following that construction of the project has started on or before 31st March, 2019:-

(i)   an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or 

(ii)   a chartered engineer registered with the Institution of Engineers (India); or 

(iii)   a licensed surveyor of the respective local body of the city or town or village or development or planning authority.

(b)   where commencement certificate in respect of the project, is not required to be issued by the competent authority, it is certified by any of the authorities specified in sub- clause (a) above that construction of the project has started on or before the 31st March, 2019;

(c)   completion certificate has not been issued or first occupation of the project has not taken place on or before the 31st March, 2019;

(d)   apartments being constructed under the project have been,  partly or wholly, booked on or before the 31st March, 2019.

Explanation.- For the purpose of sub- clause (a) and (b) above, construction of a project shall be considered to have started on or before the 31st March, 2019, if the earthwork for site preparation for the project has been completed and excavation for foundation has started on or before the 31st March, 2019.

(xxi)   "commencement certificate" means the commencement certificate or the building permit or the construction permit, by whatever name called issued by the competent authority to allow or permit the promoter to begin development works on an immovable property, as per the sanctioned plan; 

(xxviii)   "project which commences on or after 1st April, 2019" shall mean a project other than an ongoing project;

Now, look at the definition of a project which commences on or after 1-4-2019, as per this Notification.

(xxviii)   "project which commences on or after 1st April, 2019" shall mean a project other than an ongoing project.

In terms of the above definitions, any project which does not fulfil the definition of an 'ongoing project' would, by default, get treated as a 'project which commences on or after 1-4-2019' thereby forcing the Developer to go for the new scheme.

Can life be as simple as that?

Take the case of the requirement to obtain a commencement certificate from the competent authority. This requirement is virtually absent in many parts of the country and is prevalent in some cities like Bengaluru wherein the commencement certificate is required to be obtained from the Brugat Bengaluru Mahanagara Palike, popularly known as BBMP. Any Developer would say that, he would need to go through a big and laborious process to obtain the Commencement Certificate from the BBMP and in many cases this certificate is obtained at the time when the construction is almost over.

Many Developers have launched residential projects in respect of which, significant construction activity has already been completed and these projects could have been launched several months ago and these Developers could have signed up many flat buyers. Prior to 1-4-2019, Developers were collecting GST @ 12% on the total value of the project and life was fine. Since obtaining the commencement certificate was not a pre-requisite, most of these Developers did not even bother to apply to the BBMP for obtaining these commencement certificates.

Suddenly, on April Fools' Day this year, all of these otherwise running projects without commencement certificates, would cease to be treated as 'ongoing projects' and by default, would get classified as projects commencing on or after 1-4-2019. Many Developers have signed agreements with flat buyers on the basis of the erstwhile GST regime, on the basis of the GST rate of 12% with ITC and they suddenly find that, they are forced to shift to the new regime of charging GST @ 5% without ITC, in respect of these otherwise running projects. Where is the logic of treating these projects that have been running for several months, as new projects commencing on or after 1-4-2019, only on the basis of the technicality of these projects not having obtained the Commencement Certificate on or before 31-3-2019? Does this requirement not discriminate a Developer who is located in a place where the practice of obtaining a commencement certificate from the competent authority as compared to a Developer who is fortunate enough to be engaged in construction of a project in a city or town where, there is no such requirement?

Taking this discussion forward… while bringing such an important substantive requirement wherein, not obtaining the commencement certificate prior to 1-4-2019 could result in the project being classified as a new project commencing on or after 1-4-2019, shouldn't the Government have given time to Developers to apply for and get these commencement certificates, wherever it is necessary? Or, shouldn't the Government have issued Notification No.3/2019-CTR well in advance, so that, Developers could have applied for and obtained these commencement certificates. The Government, sadly enough, seems to be oblivious of the ground realities related to the obtaining of the commencement certificates and the simple fact that these certificates are more of a procedural requirement and do not reflect the actual quantum of work that could have been completed in a running project.

There is another issue that would need discussion. As per the definition of an 'ongoing project', the Completion Certificate, or the 'OC' as it is popularly referred to, should not have been obtained on or before 31-3-2019. Here again, the Government seems not to have appreciated the fact that, even after obtaining the OC, there could be installments that would continue to fall due from the flat buyers and in many cases, some amount of work such as painting, etc. could be done after the date of the OC. With these projects wherein OC has been obtained before 1-4-2019, would these projects be required to be classified as 'new projects commencing on or after 1-4-2019', wherein, the Developer would necessarily need to charge GST at the rate of 5%? Can anything be more unreasonable and illogical to treat a project in respect of which OC has been obtained on or before 31-3-2019, as a new project commencing on or after 1-4-2019?

One would request the government machinery, who seem to blissfully unaware of the ground realities, while drafting these draconian Notifications, to apply their minds to these scenarios and come out with clarifications, before May 10, 2019 so that, the Developers can accordingly exercise their options vis-à-vis their running projects.

Before parting…

A clarification to the effect that, running projects as of March 31, 2019 which fulfil the other requirements except for obtaining the commencement certificate would still be treated as an 'ongoing project' would be of great help to the Realty Sector. A further clarification to the effect that, the balance installments falling due after the OC date, in respect of running projects where OC has been obtained prior to 1-4-2019, shall continue to be covered by the old scheme would also be hugely welcome. Since, the option to shift to the new scheme for ongoing projects has to be exercised and the requisite Form IV has to be filed on or before May 10, 2019, an urgent clarification would hugely benefit this ailing Realty Sector.

(The views expressed are strictly personal)